Amendment to Accounting standard-4 Contingencies and Events Occurring After the Balance Sheet Date

(This
Accounting Standard includes paragraphs set in bold italic type and plain type,
which have equal authority. Paragraphs in bold italic type indicate the main
principles. This Accounting Standard should be read in the context of the
General Instructions contained in part A of the Annexure to the Notification.)

Introduction

1.This
Standard deals with the treatment in financial statements of

(a)contingencies,
and

(b)events
occurring after the balance sheet date.

2.The
following subjects, which may result in contingencies, are excluded from the
scope of this Standard in view of special considerations applicable to them:

(a)liabilities
of life assurance and general insurance enterprises arising from policies
issued;

(b)obligations
under retirement benefit plans; and

(c)commitments
arising from long-term lease contracts.

Definitions

3.The following terms are used in this Standard with
the meanings specified:

3.1A
contingency is a condition or situation, the ultimate outcome of which, gain or
loss, will be known or determined only on the occurrence, or non-occurrence, of
one or more uncertain future events.

3.2Events occurring after the balance sheet date are those significant
events, both favourable and unfavourable, that occur between the balance sheet
date and the date on which the financial statements are approved by the Board
of Directors in the case of a company, and, by the corresponding approving
authority in the case of any other entity.

Two types
of events can be identified:

(a)those which
provide further evidence of conditions that existed at the balance sheet date;
and

(b)those
which are indicative of conditions that arose subsequent to the balance sheet
date.

Explanation

4.Contingencies

4.1 The term “contingencies” used in this Standard
is restricted to conditions or situations at the balance sheet date, the
financial effect of which is to be determined by future events which may or may
not occur.

 All paragraphs of this Standard that deal with contingencies are
applicable only to the extent not covered by other Accounting Standards
prescribed by the Central Government. For example, the impairment of financial
assets such as impairment of receivables (commonly known as provision for bad
and doubtful debts) is governed by this Standard.

4.2Estimates
are required for determining the amounts to be stated in the financial
statements for many on-going and recurring activities of an enterprise. One
must, however, distinguish between an event which is certain and one which is
uncertain. The fact that an estimate is involved does not, of itself, create
the type of uncertainty which characterises a contingency. For example, the
fact that estimates of useful life are used to determine depreciation, does not
make depreciation a contingency; the eventual expiry of the useful life of the
asset is not uncertain. Also, amounts owed for services received are not
contingencies as defined in paragraph 3.1, even though the amounts may have
been estimated, as there is nothing uncertain about the fact that these
obligations have been incurred.

4.3The
uncertainty relating to future events can be expressed by a range of outcomes.
This range may be presented as quantified probabilities, but in most
circumstances, this suggests a level of precision that is not supported by the
available information. The possible outcomes can, therefore, usually be
generally described except where reasonable quantification is practicable.

4.4The
estimates of the outcome and of the financial effect of contingencies are
determined by the judgement of the management of the enterprise. This judgement
is based on consideration of information available up to the date on which the
financial statements are approved and will include a review of events occurring
after the balance sheet date, supplemented by experience of similar
transactions and, in some cases, reports from independent experts.

5.Accounting Treatment of Contingent Losses

5.1The
accounting treatment of a contingent loss is determined by the expected outcome
of the contingency. If it is likely that a contingency will result in a loss to
the enterprise, then it is prudent to provide for that loss in the financial
statements.

5.2The
estimation of the amount of a contingent loss to be provided for in the
financial statements may be based on information referred to in paragraph 4.4.

5.3If there
is conflicting or insufficient evidence for estimating the amount of a
contingent loss, then disclosure is made of the existence and nature of the
contingency.

5.4A
potential loss to an enterprise may be reduced or avoided because a contingent
liability is matched by a related counter-claim or claim against a third party.
In such cases, the amount of the provision is determined after taking into
account the probable recovery under the claim if no significant uncertainty as
to its measurability or collectability exists. Suitable disclosure regarding
the nature and gross amount of the contingent liability is also made.

5.5The
existence and amount of guarantees, obligations arising from discounted bills
of exchange and similar obligations undertaken by an enterprise are generally
disclosed in financial statements by way of note, even though the possibility
that a loss to the enterprise will occur, is remote.

5.6Provisions
for contingencies are not made in respect of general or unspecified business
risks since they do not relate to conditions or situations existing at the
balance sheet date.

6.Accounting Treatment of Contingent Gains

Contingent gains are not
recognised in financial statements since their recognition may result in the
recognition of revenue which may never be realised. However, when the
realisation of a gain is virtually certain, then such gain is not a contingency
and accounting for the gain is appropriate.

7.
Determination of the Amounts at which Contingencies are included in Financial
Statements

7.1The
amount at which a contingency is stated in the financial statements is based on
the information which is available at the date on which the financial
statements are approved. Events occurring after the balance sheet date that
indicate that an asset may have been impaired, or that a liability may have
existed, at the balance sheet date are, therefore, taken into account in
identifying contingencies and in determining the amounts at which such
contingencies are included in financial statements.

7.2In some
cases, each contingency can be separately identified, and the special
circumstances of each situation considered in the determination of the amount
of the contingency. A substantial legal claim against the enterprise may
represent such a contingency. Among the factors taken into account by
management in evaluating such a contingency are the progress of the claim at
the date on which the financial statements are approved, the opinions, wherever
necessary, of legal experts or other advisers, the experience of the enterprise
in similar cases and the experience of other enterprises in similar situations.

7.3If the
uncertainties which created a contingency in respect of an individual
transaction are common to a large number of similar transactions, then the
amount of the contingency need not be individually determined, but may be based
on the group of similar transactions. An example of such contingencies may be
the estimated uncollectable portion of accounts receivable. Another example of
such contingencies may be the warranties for products sold. These costs are
usually incurred frequently and experience provides a means by which the amount
of the liability or loss can be estimated with reasonable precision although the
particular transactions that may result in a liability or a loss are not
identified. Provision for these costs results in their recognition in the same
accounting period in which the related transactions took place.

8.Events Occurring after the Balance Sheet Date

8.1Events
which occur between the balance sheet date and the date on which the financial
statements are approved, may indicate the need for adjustments to assets and
liabilities as at the balance sheet date or may require disclosure.

8.2Adjustments
to assets and liabilities are required for events occurring after the balance
sheet date that provide additional information materially affecting the
determination of the amounts relating to conditions existing at the balance
sheet date. For example, an adjustment may be made for a loss on a trade
receivable account which is confirmed by the insolvency of a customer which
occurs after the balance sheet date.

8.3Adjustments
to assets and liabilities are not appropriate for events occurring after

the balance sheet date, if such events do not
relate to conditions existing at the balance sheet date. An example is the
decline in market value of investments between the balance sheet date and the
date on which the financial statements are approved. Ordinary fluctuations in
market values do not normally relate to the condition of the investments at the
balance sheet date, but reflect circumstances which have occurred in the
following period.

8.4Events
occurring after the balance sheet date which do not affect the figures stated
in the financial statements would not normally require disclosure in the
financial statements although they may be of such significance that they may
require a disclosure in the report of the approving authority to enable users
of financial statements to make proper evaluations and decisions.

8.5There are
events which, although they take place after the balance sheet date, are
sometimes reflected in the financial statements because of statutory
requirements or because of their special nature. For example, if dividends are declared after the balancesheet date but before the financial statements are
approved for issue, the dividends are not recognised as a liability at the
balance sheet date because no obligation exists at that time unless a statute
requires otherwise. Such dividends are disclosed in the notes.

8.6Events
occurring after the balance sheet date may indicate that the enterprise ceases
to be a going concern. A deterioration in operating results and financial
position, or unusual changes affecting the existence or substratum of the
enterprise after the balance sheet date (e.g., destruction of a major
production plant by a fire after the balance sheet date) may indicate a need to
consider whether it is proper to use the fundamental accounting assumption of
going concern in the preparation of the financial statements.

9.Disclosure

9.1The
disclosure requirements herein referred to apply only in respect of those
contingencies or events which affect the financial position to a material
extent.

9.2If a
contingent loss is not provided for, its nature and an estimate of its
financial effect are generally disclosed by way of note unless the possibility
of a loss is remote (other than the circumstances mentioned in paragraph 5.5).
If a reliable estimate of the financial effect cannot be made, this fact is
disclosed.

9.3When the
events occurring after the balance sheet date are disclosed in the report of
the approving authority, the information given comprises the nature of the
events and an estimate of their financial effects or a statement that such an
estimate cannot be made.

Main Principles

Contingencies

10. The amount of a contingent loss should be
provided for by a charge in the statement of profit and loss if:

(a)it is
probable that future events will confirm that, after taking into account any
related probable recovery, an asset has been impaired or a liability has been
incurred as at the balance sheet date, and

(b)a
reasonable estimate of the amount of the resulting loss can be made.

11.The
existence of a contingent loss should be disclosed in the financial statements
if either of the conditions in paragraph 10 is not met, unless the possibility
of a loss is remote.

12.Contingent
gains should not be recognised in the financial statements.

Events Occurring after the Balance
Sheet Date

13.Assets
and liabilities should be adjusted for events occurring after the balance sheet
date that provide additional evidence to assist the estimation of amounts
relating to conditions existing at the balance sheet date or that indicate that
the fundamental accounting assumption of going concern (i.e., the continuance
of existence or substratum of the enterprise) is not appropriate.

14.If an
enterprise declares dividends to shareholders after the balance sheet date, the
enterprise should not recognise those dividends as a liability at the balance
sheet date unless a statute requires otherwise. Such dividends should be
disclosed in notes.

15.Disclosure
should be made in the report of the approving authority of those events
occurring after the balance sheet date that represent material changes and
commitments affecting the financial position of the enterprise.

Disclosure

16.If
disclosure of contingencies is required by paragraph 11 of this Standard, the
following information should be provided:

(a)the
nature of the contingency;

(b)the
uncertainties which may affect the future outcome;

(c)an
estimate of the financial effect, or a statement that such an estimate cannot
be made.

17.If
disclosure of events occurring after the balance sheet date in the report of the
approving authority is required by paragraph 15 of this Standard, the following
information should be provided:

(a)the
nature of the event;

(b)an
estimate of the financial effect, or a statement that such an estimate cannot
be made.

This is applicable from 01.04.2017Amendment in Other accounting standards